What Elections Mean for Utilities

10/18/2012 10:30 am EST

Focus: STRATEGIES

Roger Conrad

Founder and Chief Editor, Capitalist Times

Big election years have an enormous impact on how utilities grow and maintain their businesses, and this one is no different, observes Roger Conrad of Utility Forecaster.

Gregg Early: I'm here with Roger Conrad, editor of Utility Forecaster, and I wanted to start out talking about the elections because I know these are big times for utilities.

There's a lot of change in Washington and that means regulations. What can you tell us about what happens in the utility industry during these big election seasons?

Roger Conrad: Well, that's a really good question. You know, I think most of the action occurs on the state level, historically. That's where most of utilities' revenues are regulated, and where the rules are made for various state markets

If you have somebody in office who is cooperating with the companies, that makes all the difference in the world in terms of prospective returns that you can expect going forward. We have had a pretty nice regulatory compact, I would call it, established over the past ten years or so.

You might recall, I think it's been about 11 years now since the demise of Enron, but that took a lot of companies down with it. What we saw after that and what we've seen the next 11 years or so has been a pretty concerted effort to repair finances, and that's been done with the cooperation of regulators.

Of course, the big challenge now is with the economy, with so many years, and so many companies repairing their finances, are new state governments coming in going to make the utilities an issue? Perhaps try to push through some policies that they perceive to be pro-consumer, but which might up being pretty anti-investor? These are the things to watch out for.

You know, governors are very important, because they appoint the state corporation commissions in most states. Legislatures can be pretty important too, and that's what I'll be watching, probably most closely, as we get these returns in.

Gregg Early: So, the states are looking for revenue from all sources at this point, and the economy doesn't seem to be chugging along as of yet. It hasn't gained much traction. Does this affect the way utilities look to spend their money or raise rates?

Roger Conrad: Tremendously. You know you have...ironically, some of the states that you think would be really very tough climates for utilities, because the economy's so bad, like Nevada, you actually have had pretty good cooperation between the companies.

But one thing that the main utility there, NV Energy (NVE), realizes is that it can't really push through big rate increases now. It has to work with regulators to see what sort of projects will be supported. What you see is a lot of collaboration with the goal of keeping the system reliability at a high level, but also avoiding putting a lot of burden on individual rate payers.

Where you have that kind of cooperation in place, you have pretty good fundamentals for utilities' earnings. You're not going to get immediately rich in these companies, but they do multiply wealth over time by paying consistent and rising dividends and building the value of their business that way.

But it's kind of a slow, patient thing and the more that is advanced by the political and regulatory situation, the better off your investors are going to be.

Gregg Early: So at this point, utilities and regulators are looking at this longer term, not too concerned with doing any major projects or major capital expenditures from the utilities side. At this point, just keeping the boat stable and looking on down the road when things might get a little bit better for them as well as their consumers.

Roger Conrad: That's optimal. There are definitely some places where utilities are under siege.

I guess one would be the nation's capital-Potomac Electric (POM) was named, I think, the worst company in America, and the reason? Mainly because they've just had so many outages.

And, if you go through the financial documents of the company, you can see what they were planning to spend on their system over the last five years and compare it to what they actually spent. It was a pretty steep drop-off.

That's the result of the company deciding not to invest in the system, in part because they figured they weren't going to get a competitive return. But it really does come back to bite the company, because now they're under fire, and there was some legislation in Maryland that didn't go anywhere, but it was to fine the company basically $1 billion.

That would be pretty significant for them-for any company, really, of a decent size. But they have a market capitalization of about $4.5 billion, so you know, you lop a billion off of that, or make some kind of fine out of it, that would be pretty catastrophic for shareholders.

Gregg Early: Absolutely. Wellm are there other companies out there that you like?

Roger Conrad: Well, ironically, right across the river from PEPCO is Dominion Resources (D), Virginia Power. They have precisely the right kind of relationship with the regulators in their state, and they're able to pretty much do long-term planning, get different investments through that they want to get through. And it's been good for shareholders as well as for customers.

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